Consumer Economics Credit Credit Investing Investing

CREDIT Advantages / Disadvantages 3 Types of Credit 3 C’s of Credit

Pro’s & Con’s of Credit Advantages Advantages Buy now, pay later Buy now, pay later Builds credit history Builds credit history Rewards Rewards Emergencies Emergencies Small payments on expensive items Small payments on expensive items Safer than cash Safer than cash Faster than checks Faster than checks Pick 3 Pick 3 Disadvantages Interest Additional fees Debt beyond your means Impulse shopping Ruin credit Possibility of ID theft Pick 3

Terms to Know Credit = Buying today, paying later Credit = Buying today, paying later Principal = the amount of money borrowed Principal = the amount of money borrowed Interest = Additional costs of borrowing $ Interest = Additional costs of borrowing $ APR = Annual Percentage Rate; the cost of credit as a yearly percent, used to determine cost APR = Annual Percentage Rate; the cost of credit as a yearly percent, used to determine cost Finance Charges = principal X the APR; the actual cost of using credit in $’s Finance Charges = principal X the APR; the actual cost of using credit in $’s Credit Bureau = agency that produces credit reports Credit Bureau = agency that produces credit reports

3 Types of Credit Single Payment Credit Single Payment Credit Use good/service, billed later Use good/service, billed later No Interest No Interest Ex: doctor, cell phone, utilities Ex: doctor, cell phone, utilities Revolving Credit Revolving Credit Can decide how much to borrow up to a pre-set limit Can decide how much to borrow up to a pre-set limit Interest is charged only if the entire bill is not paid in full on the first payment Interest is charged only if the entire bill is not paid in full on the first payment Ex: Credit cards Ex: Credit cards Installment Credit Contract to pay a set amount on a set date each month Interest is included in the payment Ex: car loan, mortgage, school loan

3 C’s of Credit Character Character Reliability, honest, likely to pay back the money Reliability, honest, likely to pay back the money Credit Report Credit Report Capacity – 2 parts: Capacity – 2 parts: Income (how much do you make?) Income (how much do you make?) How much are you already spending on credit? How much are you already spending on credit? Collateral Items of value owned, but willing to give up if you can not repay the debt Secured loan = a loan that requires collateral Unsecured loan = no collateral, harder to get

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Using a Loan Save money by: Save money by: Looking for the lowest Annual Percentage Rate (APR) Looking for the lowest Annual Percentage Rate (APR) Increasing the down payment to lower the interest you will pay Increasing the down payment to lower the interest you will pay Shortening the terms (# of years) will require you pay a higher amount each month, but will result in less interest overall Shortening the terms (# of years) will require you pay a higher amount each month, but will result in less interest overall

Examples: $200,000 loan at 5% APR for 30 years = $200,000 loan at 5% APR for 30 years = Monthly payment ______ Monthly payment ______ Total Interest paid _____ Total Interest paid _____ $175,000 loan at 4% APR for 15 years = $175,000 loan at 4% APR for 15 years = Monthly payment ______ Monthly payment ______ Total Interest paid _____ Total Interest paid _____

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Why Invest? To gain more money (earn interest) To gain more money (earn interest) Emergencies Emergencies Save for large purchases Save for large purchases For example, a down payment on a home For example, a down payment on a home Retirement Retirement Currently 80% of retirees plan to work in retirement Currently 80% of retirees plan to work in retirement

Things to Consider When Choosing Investments Minimum Balance Minimum Balance Access to funds Access to funds Ease of use Ease of use Liquidity Liquidity Returns Returns Fees Fees Risk Risk

Things to Know Risk to Returns Relationship – Risk to Returns Relationship – Typically, the higher the level of risk you are willing to take, the higher the average returns could be (like stocks & real estate) Typically, the higher the level of risk you are willing to take, the higher the average returns could be (like stocks & real estate) The lower the risk, the lower the returns (like government bonds and savings accounts) The lower the risk, the lower the returns (like government bonds and savings accounts) Making Money on Stock – Making Money on Stock – Dividends – your share of profit from the company Dividends – your share of profit from the company Capital Gains – selling the stock for more than you bought it for Capital Gains – selling the stock for more than you bought it for Diversification – Diversification – Spreading you money out into a number of investments Spreading you money out into a number of investments If one should fail, you won’t lose everything If one should fail, you won’t lose everything Reduces risk slightly Reduces risk slightly